monetary and exchange rate policies in malawi presented by charles s.r. chuka governor, reserve bank...
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MONETARY AND EXCHANGE RATE POLICIES IN MALAWI
Presented byCharles S.R. Chuka
Governor, Reserve Bank of Malawi
“Toward More Inclusive Growth” ConferenceLilongwe, November 2-3, 2012
Outline• Introduction• Evolution of Monetary and Exchange Rate
Policies
• Recent Monetary and Exchange Rate Policies changes
• Policy Challenges • Outlook• Conclusion
2
Key Points
• Inflation being driven by food scarcities
• Exchange rate instability reflects continuing liquidity overhang
• Monetary policy focusing on tightening M2 growth
3
Structure of the Economy
Share of trading activities doubled
4
1980 1990 2000 2010 2011 2012
Agriculture, forestry and fishing 32.7 21.6 22.6 27.8 28.3 27.0
Wholesale and retail trade 12.7 8.2 12.1 20.7 20.6 20.6
Manufacturing 10.2 8.8 7.5 10.6 10.3 9.2
Transportation and Communication 6.0 3.8 2.4 3.8 3.8 3.9
Financial/Professional Services 6.0 4.4 4.6 2.1 2.1 2.1
Construction and Building 5.0 2.7 1.3 3.2 3.0 3.5
Electricity, Gas and Water Supply 1.6 1.5 0.8 1.5 1.5 1.5
Mining and Quarrying 0.0 0.0 0.8 2.3 2.1 2.6
Objectives of Monetary and Exchange Rate Policies
• Main objective:Price and Financial Stability
• Other objectives: Sustainable balance of payments and economic growth
• Exchange Rate policy is aimed at external competitiveness
6
Evolution of Monetary & Exchange Rate Policies
Period Monetary Policy Exchange Rate
Policy
Lending
F/work
Real GDP
growth
Inflatio
n Rate
1964-1986
(Financial
Repression)
o Interest rate controls
o Preferential lending to agricultural sector
o Price control on selected commodities
Fixed Exchange Rate
regime
Credit
controls
5.0 7.8
1987-1993
(Financial
Reforms)
o 1987-deregulation of lending rates
o 1988-deregulation of deposit rates
o 1989-Review of the Banking Act
o 1990-abolition of preferential lending rates
Pegged to a basket of
currencies
Deregulated
lending
3.3 19.0
7
Evolution of Monetary & Exchange Rate Policies
8
Period Monetary Policy Exchange Rate Policy Lending
F/work
Real
GDP
growt
h
Inflation
Rate
1994-2007
(financial
liberalization)
o Indirect Monetary Policy instruments: Discount rate, OMO, LRR
o New commercial banks entered the system
o Free floato Partial deregulation of
exchange controlso establishment of foreign
exchange bureauo establishment of FCDAo establishment of foreign
exchange market,
Deregulated
lending
3.2 30.4
2008-April
2012: liberalized
financial sector)
o Indirect Monetary Policy instruments: Discount rate, OMO, LRR
Defacto fixed exchange Rate with administrative controls over current account transactions
Deregulated
lending
6.0 10.4
May 2012- to
date;
(liberalized fin.
sector)
o Indirect Monetary Policy instruments: Discount rate, OMO, LRR
Free float with liberalized current
account transactions
Deregulated
lending
1.6 20.1
Monetary and Exchange Rate Policy Framework & Instruments
• Reserve Money Programming (NDA + NFA)–Discount Rate–Open Market Operations–Foreign Exchange Operations–Liquidity Reserve Requirements–Moral Suasion/Signalling• Exchange rate regime: Managed
Float
9
Impact of Fixed Exchange Rate Policies
• Loss of foreign exchange reserves• Import backlog accumulated• Fuel scarcity• Downsizing by companies• GDP growth was reducing
18
Recent Policy Reforms
• Exchange Rate floated May 2012• Bank rate was adjusted upwards
twice-May and July 2012• Fuel pricing is now based on
Automatic Pricing Mechanism
19
Recent Policy Reforms (cont’d)
• RBM sold about US$220 million between May and August 2012 compared to US$37.7 million sold in similar period in 2011
• Tobacco proceeds re-routed through commercial banks
• RBM provided liquidity to stressed banks
20
Exchange Rates: Commercial and Bureau rates
24
•Commercial Banks and Bureau rates are now converging
Recent Policy reforms, cont’d
Gross Official Reserves (GOR)
Gross Official Reserves started to improve in July 2012
25
Recent Policy reforms, cont’d
Challenges
• Containing M2 growth at current levels will depend on successful rollover of domestic debt
• Monetary policy space is declining• Pressure on exchange rate is likely to persist
due to seasonal factors• Limited supply of foreign exchange• M2 growth is slowing down but inflation is
rising
27
Outlook
• Foreign exchange shortages are envisaged to persist as seasonally expected
• Given the obtaining macroeconomic fundamentals, there is need to tighten further monetary policy or maintain the current tight stance.
29
Conclusion
• Given the current macro-scenario, threats of inflation pressures still persist.
• The question is to what extent can monetary policy still tighten without severe adverse effects on the economy?
30